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How to Avoid Corporate Scandal

06/29/2012 04:11 EDT | Updated 08/29/2012 05:12 EDT

When a corporate scandal is uncovered, what typically happens is that the wrong doer is revealed, the media publicizes it, and the company expresses shock and dismay, with an assertion that it will keep a better eye on things from that point on. The firm's declaration that it will totally clean house often placates the markets and the regulators.

But this so-called solution is merely a Band-aid on an open sore. The model needs to be changed. If we're going to get a handle on stopping misconduct, we need to look more closely at what creates the environment that encourages bad behavior in the first place. And a good starting point for this discussion is Dan Ariely's new book, The (Honest) Truth about Dishonesty: How We Lie to Everyone - Especially Ourselves (HarperCollins).

No secret, I'm a big fan of Ariely, a professor of behavioral economics, who believes that we're all ethically challenged sometimes. In The (Honest) Truth, Ariely says he began to wonder, when we're part of a group, whether we're tempted to cheat more or less. That leads to his question: "Is a group setting conducive or destructive to honesty?"

But we can take that further by asking whether the entire ethos of a corporation is conducive to bad behavior. I believe it is. And that means, if a higher up in your company has perpetrated something scandalous, shameful, or criminal - embezzlement, entering into risky contracts, having affairs - then simply wagging your finger at the person who brought huge shame to the company is meaningless. Something else needs to be done.

What's required is not only ridding the existing vermin from the building. It's making sure that good people don't turn into vermin in the first place. In other words, the solution to mitigate this normal human tendency to rationalize bad behavior is not to try to stop people from rationalizing. The way to go is to remove the grounds for rationalization altogether.

The name of the game is getting to the top of the slippery slope and stopping good people from turning bad.

Here are my tips to CEOs for making their workplace - both in and out of the office - as free of scandal-causing temptations as humanly possible.

1. Focus on the social norms. Behavioral economists like Ariely talk about how we cheat up to the point where it impacts our ability to feel good about ourselves. Leaders need to model behavior that would make it clear that unethical conduct is outside the norm. This requires more than just talk. Success will be obvious when it is clear to every employee what's expected behavior.

2. Unequal treatment is the gateway to rationalizing misconduct. The expression "Walk the talk" applies here. Employees can smell out unequal treatment and favoritism, not only when certain employees are given a free ride, but when they see that upper management and CEOs themselves do not abide by policy. Employees who observe these discrepancies often feel justified in putting their own interests first.

A quote from Roger Corbett, the former CEO of Australia's largest supermarket chain, is especially relevant here. He noted, "If a chief executive espouses one standard but lives another in his personal life and it is seen by the people in the business, then that moves the business further towards cynicism."

3. No yes-men allowed. One of the most common ways good leaders fall to the dark side is by not having anyone hold them accountable for their actions. Like the medieval court jester speaking truth to the king, every leader must create a means by which it is safe for someone or some group to challenge actions and question decisions. Often just by merely verbalizing one's thinking to another person good people can catch themselves before they begin the slide down the slippery slope.

The corporation's goal should always be to address the factors that contribute to misconduct in the first place before misconduct happens.

Make no mistake about it. For companies that want to be perceived as operating "by the book," it's critical that they do their homework before trouble starts. As Dan Ariely points out, none of us are above temptation. That's why organizations need to be.